Effective January 1, 2026, new California law prohibits stay-or-pay clauses in contracts of employment with limited exceptions.
Seyfarth Synopsis: Effective January 1, 2026, new California law prohibits stay-or-pay clauses in contracts of employment with limited exceptions.
Under new Section 16608 of the California Business and Professions Code, effective January 1, 2026, employers are prohibited from entering into an employment contract or other contract relating to the employment relationship that requires an employee to repay any amount to the employer upon termination of employment, except in specific limited circumstances.The law provides that contracts with non-compliant stay-or-pay provisions will be treated as void.Also, an affected employee can bring a civil lawsuit in which they can seek damages in the amount of the greater of their actual damages or $5,000, injunctive relief, and attorneys' fees and costs related to the lawsuit.
One of the exceptions to the prohibition on these repayment obligations, that will likely be themost commonly used, is for discretionary payments made at the outset of employment (e.g. sign-on bonuses or relocation reimbursements) if each of the following conditions are met: (1) the promise to repay is in a separate written agreement; (2) the employee is notified of the right to consult an attorney no less than five days prior to signing the agreement; (3) any repayment obligation cannot be longer than 2 years; (4) the amount to be...
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